Does U.S. jobs disappointment mark return to risk aversion?

Forex markets were taken by surprise that the U.S. economy only created 88,000 jobs in March while a poll of analysts conducted by Bloomberg anticipated a number closer to 190,000. The U.S. dollar quickly sold-off, but could that be reversed quite soon?

A weakening U.S. economy spells bad news for equities and commodities as funds will quickly switch to the safety of U.S. Treasuries and the U.S. dollar, at least until central banks deploy some more monetary shock and awe. In other words markets could be embarking on one of their risk-off phases.

However, it should be pointed out that one month's numbers don't make a trend and since late last year jobs creation in the U.S. has been gathering pace – also the unemployment rate did fall to 7.6% in March from 7.7% in February. But there is reason to believe that this weak number may form part of a new trend of slower jobs creation in the months to come with the U.S. economy facing a number of headwinds.

Further big EUR/USD gains unlikely if global slowdown on the cards

U.S. sequestration is definitely one of them, where the government implemented from March 1 a steady stream of rolling spending cuts in the public sector. There are also payroll tax hikes taking place.

The spending reductions are about $85.4 billion for the fiscal year 2013 and the U.S. Congressional Budget Office estimates they could shave 0.6% off U.S. economic growth. Given the U.S. economy is not that strong these cuts could in months to come have a disproportionately negative impact.

This of course puts more emphasis on the U.S. Federal Reserve's monetary policy to offset the fiscal drag created by sequestration. That along with the weak jobs number no doubt means the Fed won't be turning off the monetary taps any time soon and certainly not this year. Gold perked up a little no doubt due to that factor – though it still remains in a short- to medium-term bear market.

The other factor is persistently high oil prices and for a relatively energy intensive economy like the U.S. that has a definite impact of reducing disposable income. Traditionally high oil prices have been key to tipping the U.S. economy into recession. On the flip side U.S. consumers and industry have enjoyed the benefits of the shale gas revolution leading to much lower natural gas prices than seen in other parts of the world.

A potentially slowing U.S. economy will weigh heavily on global conditions with the Eurozone looking sicklier by the month with even mighty Germany looking sluggish. Certainly the Eurozone crisis is far from over and will no doubt erupt again sometime this year with the periphery mired in depression conditions. A global economic slowdown would make another flare up of the Eurozone crisis more likely.

If fear is to return to the markets – and it will require more data to prove the U.S. economy is definitely slowing as some recent numbers have been positive – then the U.S. dollar would probably be given a jolt upwards versus currencies such as CAD, GBP, AUD and the structurally flawed EUR.

Ironically, JPY may strengthen, despite the best efforts of the Bank of Japan, as investors there repatriate funds home as they often do when a crisis strikes.

About the Author

Justin Pugsley is the forex and gold markets analyst for New Zealand-based trading platform provider MahiFX. He is a keen student of markets, economics and history. Prior to working with MahiFX, Justin worked for a number of leading media organisations such as Thomson-Reuters and Dow Jones/Wall Street Journal.